Should I take an NHS pension at 55 or wait until I’m 60? Steve Webb replies

I have an NHS pension from 1995 that I no longer pay into as it has been stopped.

I am 55 years old and am considering quitting as soon as possible, as many colleagues have done.

If it is indexed and therefore will increase annually, I think I should take it out now.

It will increase by the time I’m 60, but if I take it now I’ll benefit from a few extra years of retirement.

The other question is: should I take the larger tax-free lump sum or a smaller amount?

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Steve Webb replies: There are two important ages to consider when it comes to your company pension.

One of these is the age at which you first gain access to your pension. This is the ‘minimum’ retirement age.

The other is the age at which you can withdraw your pension in full. This is the ‘normal’ retirement age. It is important not to confuse the two.

In the 1995 part of the NHS pension scheme, the ‘normal’ retirement age for most members is 60. The ‘minimum’ retirement age depends on your individual circumstances, but from your question it sounds like you have been told it is 55. You.

Although this means that you can in principle withdraw your pension now, you must understand that you will receive a much smaller pension and a fixed amount if you withdraw it before the age of 60.

To give an example, the NHS pensions website has a guidance for early retirement which states: ‘If you apply for your pension immediately upon leaving employment’, certain standard deductions apply.

Someone who takes his pension at the age of 55 instead of at the age of 60 will have his pension reduced by 20 percent throughout his entire pension. Their lump sum will be reduced by just over 11 percent.

I want to emphasize that this is a general guideline and before making a decision you need to know the exact numbers based on your specific situation.

Most importantly, if you retire before the normal retirement age, you will receive a permanently reduced pension.

That may not matter if you still have wages, but as soon as you stop earning, you have to get by on a much lower pension.

You also have to think about taxes.

If you’re still working full-time, it’s possible that your wages plus your pension will put you in the higher income tax rate band, which could mean part of your pension is charged at 40 percent instead of the standard 20 percent. .

This probably wouldn’t happen if you waited until you retired before taking your pension.

You asked if the pension is ‘indexed’, but it is important to understand the difference between what happens to your pension in the years before you retire and what happens once you start receiving the pension.

If you have earned a pension from past service, but have not yet started withdrawing it, it will not be frozen. Instead, the pension must be ‘revalued’ so that it keeps pace with inflation between the time you leave the scheme and the time you finally receive the pension.

This means that if you wait from age 55 to 60 to receive your pension, the cash amount you get will be higher because of that five-year “revaluation.”

Separately, the pension increases as soon as you receive it, a process called ‘indexation’. Once you retire, your pension will normally increase every year with inflation. This applies every time you withdraw your pension.

If you are still working for the NHS, there are rules about taking an NHS pension whilst continuing to work for the NHS. You should check with your HR department before making a decision.

For those who were part of the 1995 scheme, these rules actually changed on 1 October 2023, so it’s worth making sure you have the latest information to inform your decision (see: NHS England retires and returns).

To your question whether you should take the highest possible tax-free lump sum (and a lower pension), I can point out a number of things to think about, but I cannot give you advice without knowing your personal circumstances.

At first glance, it may seem very attractive to carry as much tax-free cash as possible – after all, who doesn’t love a large tax-free lump sum!

The problem is that there is a price to pay for this extra lump sum, namely a reduction in your weekly pension.

In many schemes you lose a lot of pension in return for every pound of lump sum payment, so you could make a serious dent in your regular income in retirement by making the most of the tax-free money.

You may want to ask yourself the following questions.

– Do I need the lump sum now?

You may want to pay off a mortgage or a large amount of debt, and this may make a larger lump sum payment more attractive.

– Am I in good health or not?

If you are in poor health, an early lump sum payment and a limited number of years of reduced pension may seem attractive.

But if you’re in good health, you can expect many more years of a reduced pension, and that may not seem like such a good deal.

– What am I going to do with the redemption amount?

It is important not to take a lump sum (with consequences for your pension) and then put it in a checking account or a savings account with a low interest rate.

If you are going to invest it, are you confident that you know what to do and how much risk you are willing to take?

– Crucial: can I make ends meet with the reduced pension?

If the price of a large lump sum is a much smaller pension, and a combination of your reduced NHS pension and your state pension would ensure you get by every month, then that may be too big a sacrifice.

The correct answer may be different for each individual.

As you have some big decisions to make about when to take your NHS pension, when to retire and how much lump sum to take, you can benefit from impartial financial advice.

Although you will have to pay for advice, you may want to see if you can find an advisor who will give you a one-off advice session to get your retirement planning started on the right foot.